For the seventh time this year, the US Federal Reserve has again hiked the benchmark lending rate – which is seen as bad news for the United States’ already beleaguered housing sector.
Within this year, consecutive interest rate hikes have put a great deal of pressure on the domestic housing market and driven mortgage rates over 7% for the first time in 20 years.
But with the Fed declaring that it will take a more measured approach to rein in the economy, what would this mean for the housing sector? Can potential homebuyers expect mortgage rates to go down, or are higher rates here to stay?
One thing is for sure, though: we may have seen the last 3% mortgages – at least, for now.
The Current State of Affairs
Throughout much of 2022, those shopping for a home have seen their buying power dwindle as higher interest rates continue to increase what they would need to pay every month.
According to statistics from Freddie Mac, mortgage rates started the year at a reasonable 3.22%. However, from the time the Fed began to raise interest rates to combat inflation, 30-year fixed-rate mortgages began to soar in the second quarter of the year.
By the time the third quarter drew to a close, mortgage rates doubled and went beyond 7%. While rates went down slightly over the past few weeks, housing loans remain expensive compared to the almost criminally low rates buyers took advantage of between 2020 and 2021.
Well, Now What?
As a result, many Americans have put off buying a new home. According to Fannie Mae’s most recent seller sentiment survey, both home buying and home selling have lost some measure of appeal since this time last year.
The survey also showed that real estate professionals expect an odd dichotomy in the coming year: home prices will go down even as mortgage rates continue to rise.
Fannie Mae senior vice-president and chief economist Doug Duncan believes that affordability issues could cast a damper on mortgage demand. Likewise, homeowners with substantially lower than the usual mortgage rates could shy away from listing their property, so as not to take on a new, significantly higher rate on their mortgage.
What If Inflation Slows Down?
For her part, Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, feels that mortgage rates could stabilize under the critical 7% point – but that’s if inflation steadily decelerates over the next few months. While that is still double the 2021 rate, it is still a better prospect than 30-year fixed mortgages hitting the historical average of 8%.
William Raveis Mortgage’s regional vice-president Melissa Cohn is more optimistic. In her forecast, buyers may expect 2023 mortgage rates to slip down to around 4% to 5% – essentially the way things were before the pandemic hit.